Australian Federal Budget 2024-25: Superannuation 

There were no major new measures for superannuation and retirement incomes in the Budget.

Contrary to expectations, the Budget did not include any further details of the Government’s Payday Super initiative, which was announced last year, requiring employers to pay their employees' Superannuation Guarantee (SG) contributions at the same time as their salary and wages from 1 July 2026. The Budget confirmed the Government’s undertaking to make superannuation contributions on Government Paid Parental Leave (PPL) payments from 1 July 2025. 

The Budget only included a minor measure relating to the additional earnings tax on super balances over $3 million, for which legislation is currently before Parliament. However, we have taken the opportunity in this commentary to provide an update on the proposed tax, taking into account a recent consultation on how it will apply to defined benefit members, along with proposed details of an associated measure relating to defined benefit notional contributions.

In March this year, the Government announced that from 1 July 2025 it will make superannuation contributions on Government-funded PPL payments.

Paying superannuation on PPL was a key recommendation of the Women’s Economic Equality Taskforce and has long been campaigned for by the superannuation industry including Mercer, along with unions and the women’s movement, as a way to help close the retirement savings gap between men and women.

The Budget has allowed for $1.1 billion over four years from 2024–25 (and $0.6 billion per year ongoing) to pay superannuation on Government-funded PPL for parents of babies born or adopted on or after 1 July 2025. Payments will be made annually as a contribution to eligible individuals’ superannuation funds from 1 July 2026, based on the Superannuation Guarantee (12 per cent of their PPL payments).

The measure is expected to benefit 180,000 families each year.

Mercer welcomes the decision to pay the Superannuation Guarantee on PPL, which seeks to improve equity and help close the superannuation gap for individuals, predominantly women who take time out of the workforce to raise a family.

Adjustments to administrative processes may be necessary to accommodate the new contributions, depending on specifics such as payment methods and whether they need to be identified as government contributions. 

The Budget did not provide any details on how the administration of the program will work. For example, will the superannuation contributions be paid directly to super funds by the Government or via employers? It looks likely to be the latter, as the Budget allows for $10.0 million over two years from 2024–25 to provide additional support for small business employers in administering PPL. Many employers already offer paid parental leave beyond government provisions, including superannuation. This measure is likely to prompt employers who do not currently provide superannuation on paid parental leave to review and potentially update their policies.

A major new piece of superannuation legislation currently before Parliament proposes an additional earnings tax on superannuation balances exceeding $3 million at the end of a financial year. Announced in 2023 and set to start on 1 July 2025, this tax would apply at a rate of 15 percent on earnings related to the portion of the balance over $3 million, resulting in a combined headline tax rate of 30 percent.

Additionally, the Government proposes updating notional contribution rates for defined benefit (DB) members, leading to higher contributions used for concessional contribution cap purposes and Division 293 tax from 2025-26.

Noting that funds do not currently report (or generally calculate) taxable earnings at an individual member level, the proposed approach uses an alternative method for identifying taxable earnings on balances over $3 million:

• The additional tax will apply to the earnings attributed to the proportion of an individual’s Total Superannuation Balance (TSB) over $3 million at the end of the financial year.
• Total Earnings for this purpose will be calculated based on the change in the TSB over the year, less net contributions, plus withdrawals.
• Excess Earnings will be calculated as Total Earnings multiplied by the proportion of the total balance over $3 million at the end of the financial year (e.g. $1 million / $4 million = 25 percent for a TSB of $4 million.
• The additional tax will be 15 percent multiplied by Excess Earnings.
• Negative Excess Earnings (that is, a loss) for a financial year can be carried forward to reduce the tax liability in future years.
• The calculation of Total Earnings includes all notional (unrealised) gains and losses.
• The Australian Tax Office (ATO) will calculate Taxable Earnings and the Excess Earnings tax each year and send assessments to individuals, who can elect to pay the tax directly or from their super fund/s.
• The new tax will be separate from an individual’s personal income tax, similar to the existing Division 293 tax on concessional contributions for high income earners.
• TSBs in excess of $3 million will be tested for the first time on 30 June 2026, with the first notices of a tax liability expected to be issued to individuals in the 2026-27 financial year.

The working of the new tax for DB is proposed to follow the same formula as set out above, but with modifications which are to be specified in regulations rather than in the primary legislation which is currently before Parliament.

The Government recently consulted on exposure draft regulations setting out the proposed treatment for DB, including:

• The methods to determine the amount of DB ‘balances’ for the purpose of determining an individual’s TSB (see below for further details).
• Using DB notional contributions (rather than actual contributions) in the earnings formula.

Under the draft regulations, it is proposed that the DB value to be included in an individual’s TSB will generally be the value used for Family Law purposes (the Family Law value or FLV). This is calculated using a formula and factors set out in Family Law Regulations.

Requiring FLVs to be calculated every year for all DB members would impose significant additional costs on most DB funds, as very few funds are currently set up to automatically calculate FLVs.

The draft regulations proposed to mitigate this cost for some funds, by allowing the vested benefit (generally equal to the voluntary leaving service benefit) to be used for certain DB members – specifically private sector DB fund members entitled to lump sum benefits only, whose DB vested benefit at the prior 30 June was less than $1 million. 

It is proposed that Division 296 tax relating to DB interests will be able to be deferred until the DB becomes payable, under arrangements modelled on those currently applying to Division 293 tax. 

Last year’s Budget projected increased revenue from updating the notional contribution calculation for DB members. These notional contributions are used for concessional contribution caps and Division 293 tax purposes. The draft Division 296 tax regulations propose recalculating current DB notional contribution rates based on updated actuarial assumptions, effective from 1 July 2025.

The Government has announced extra funding of $9.2 million over four years from 2024–25 (and $1.1 million per year ongoing) to the Commonwealth Superannuation Corporation and the Department of Finance to implement the Division 296 tax and notional contribution rate changes for members of the Commonwealth defined benefit superannuation schemes.

Mercer supports reducing tax concessions on very large super balances for sustainability and equity reasons. We back the proposed measure, provided it minimises additional administration costs for all members or employer sponsors for DB members.

However, we advocate for in-built indexation to prevent the $3 million threshold's real value from declining over time and to maintain a reasonable margin over the CPI-indexed pension transfer balance cap. Mercer recommends setting the $3 million threshold to be at least 1.5 times the pension transfer balance cap.

We are concerned about the cost and complexity of the proposed DB arrangements, highlighted by the $9.2 million in Budget funding for implementing changes in Commonwealth DB schemes.

Mercer advocates for a simple approach to DB arrangements, minimising additional calculations and reporting.

We therefore support the draft regulations making provision for the simple ‘vested benefit’ method to be used for the Division 296 tax value for certain DB members.  However, we believe there is much wider scope for simplified methods to be used for DB members who are unlikely to have TSBs in excess of $3 million, so that the need for costly annual FLVs is minimised, particularly in private sector funds. Accordingly, Mercer’s submission on the draft Division 296 tax regulations has made recommendations in relation to wider application of simplified methods.

Our submission recommended simplifying or cancelling the proposed update of actuarial assumptions for notional contributions to reduce cost and complexity. If the update proceeds, it is expected to increase notional contribution rates for some, but not all, DB members, with the impact varying based on their benefit design.

The ATO will handle most of the new tax administration, but funds will likely need to report additional information to enable the ATO to calculate the tax. It is still unclear what specific information will be required and whether it will need to be reported for all members or only those potentially affected by the tax. Funds will need to wait for further details to understand the reporting implications.

Trustees should anticipate that DB members with large balances will want to know their DB amounts for Division 296 tax purposes before 1 July 2025. According to the draft regulations, the FLV will likely apply for DB members subject to the Division 296 tax.

In this context it is important to be aware that the FLV, but the new methods and factors are not proposed to be published until at least the December quarter 2024. Funds with scheme-specific Family Law factors may also be required to undertake a review.

If the proposed update of DB notional contribution assumptions proceeds, this will require actuarial calculation of the new rates and associated updates of fund notional contribution calculations and reporting systems. It will require trustee communication to affected members in due course as it may affect their contribution decisions. 

While some senior employees may be affected and there may be some additional administration costs for DB employer sponsors, the tax is not expected to have a material impact on employers.

However, if the proposed update of DB notional contributions proceeds, it will require trustee communication to affected employees in due course and employers may wish to be involved. 

Most members will be unaffected by the new tax. Budget estimates suggest that this measure will impact around 80,000 individuals in 2025–26, or approximately 0.5 percent of individuals with a superannuation account, though this may increase into the future.

For members with high superannuation balances, this tax would introduce another threshold at which superannuation tax concessions are withdrawn as balances increase. Other existing thresholds include:

• $500,000, at which catch-up concessional contributions are no longer available.
• $1.68 million ($1.66 million from 1 July 2024) where access to the bring-forward of non-concessional contributions decreases.
• $1.9 million beyond which non-concessional contributions are no longer permitted, and the limit on amounts that can be transferred into tax-free pensions is reached. 

This new limit of $3 million would form an additional threshold, above which the increased tax on earnings would apply.

Members with high balance accounts may consider whether there is any action they can take to reduce the potential impact of the new tax.

If the proposed update of DB notional contributions proceeds, affected members will need to take this into account in their contribution planning – for example, the remaining cap space for additional salary sacrifice contributions will be reduced for some members for 2025-26 and later years.

Contribution planning for DB members may also be affected if the value of their DB for tax purposes will be measured on a different basis than currently from 30 June 2025 – for example, a change from withdrawal benefit to FLV (which may result in an increase or a decrease, depending on the member’s circumstances). 

The Government will provide $187 million over four years from 1 July 2024 to the ATO to strengthen its ability to detect, prevent and mitigate fraud against the tax and superannuation systems. Funding includes: 

• $78.7 million for upgrades to information and communications technologies to enable the ATO to identify and block suspicious activity in real time.  
• $83.5 million for a new compliance taskforce to recover lost revenue and intervene when attempts to obtain fraudulent refunds are made.  
• $24.8 million to improve the ATO’s management and governance of its counter-fraud activities, including improving how the ATO assists individuals harmed by fraud. 

The Government has committed to ‘recalibrate’ the Fair Entitlements Guarantee Recovery Program to pursue and recover a greater proportion of unpaid superannuation entitlements owed by employers in liquidation or bankruptcy from 1 July 2024. This initiative is expected to achieve an extra $44.4 million over four years from 2024–25 (and $96.9 million over the medium term) to be paid to superannuation funds. 

The Government will provide $206.4 million over four years from 2024–25 (and $7.2 million per year ongoing) to improve the data capability and cyber security of APRA and ASIC and to continue the stabilisation of the regulators’ business registers and modernisation of their legacy systems. 

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